Unlimited FDIC Insurance on IOLTA Accounts Likely to Expire; $250K Will Be New Client Coverage Limit

Lawyer IOLTA accounts that help fund civil legal aid and other legal programs are likely to lose their unlimited federal insurance coverage on Jan. 1.

The ABA Governmental Affairs Office says it appears unlikely that lawmakers will act this year to extend the unlimited coverage provided by the Federal Deposit Insurance Corp., according to an ABA statement.

If Congress does not act, the amount of FDIC insurance available will be $250,000 per client, per financial institution, as long as the account is properly designated as a trust account and there is a proper accounting of each client’s funds.

A provision of the 2010 Dodd-Frank law that provided for the unlimited coverage is scheduled to sunset on Dec. 31. “Although there have been attempts in Congress to extend that coverage for an additional two years,” the ABA statement says, “and the American Bar Association and others have lobbied for that extension, those efforts have not been successful due largely to legislative maneuvering that was unrelated to the merits of the issue.”

The FDIC website provides an example of how the new $250,000 limit would play out.
“If a law firm maintains an IOLTA with $250,000 attributable to Client A, $150,000 to Client B, and $75,000 to Client C, the account would be fully insured if the IOLTA meets the requirements. … If the clients have other funds at the same [insured depository institution], those funds would be added to their respective shares of the funds in the IOLTA for insurance coverage purposes.”

All 50 states, the Virgin Islands and Washington, D.C., have IOLTA programs that use the interest from the accounts for legal causes, according to the website of the ABA Commission on Interest on Lawyers’ Trust Accounts. Lawyers deposit client money into a pooled IOLTA account when the amount is small, or it is being held for only a short time. The pooled money can earn interest that would be consumed by costs if separate accounts were opened for each client.